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Bureau of Mines Information Circular/1982 



State Severance Taxes: A Summary 
and an Analysis of the Impact of Rate 
Changes on Copper Recovery Costs 

By Phillip N. Yasnowsky and Annette P. Graham 




UNITED STATES DEPARTMENT OF THE INTERIOR 



Information Circular 8879 



Info 



State Severance Taxes: A Summary 
and an Analysis of the Impact of Rate 
Changes on Copper Recovery Costs 



By Phillip N. Yasnowsky and Annette P. Graham 




UNITED STATES DEPARTMENT OF THE INTERIOR 
James G. Watt, Secretary 

BUREAU OF MINES 
Robert C. Horton, Director 



^ 



As the Nation's principal conservation agency, the Department of the Interior 
has responsibility for most of our nationally owned public lands and natural 
resources. This includes fostering the wisest use of our land and water re- 
sources, protecting our fish and wildlife, preserving the environmental and 
cultural values of our national parks and historical places, and providing for 
the enjoyment of life through outdoor recreation. The Department assesses 
our energy and mineral resources and works to assure that their development is 
in the best interests of all our people. The Department also has a major re- 
sponsibility for American Indian reservation communities and for people who 
live in Island Territories under U.S. administration. 







This publication has been cataloged as follows: 



Yasnowsky, Phillip N 

State severance taxes: a summary and an analysis of the im- 
pact of rate changes on copper recovery costs. 

(Information circular / U.S. Dept. of the Interior, Bureau of Mines ; 
8879) 

Bibliography: p. 23. 

Supt. of Docs, no.: I 28.27:8879. 

1. Mines and mineral resources— Taxation— United States. 2. Min- 
eral industries— Taxation— United States. 3« Mineral industries— United 
States— Accounting. 4. Copper industry and trade— Taxation— United 
States. 5- Taxation, State. I. 'Graham, Annette P. II. Title. HI. 
Series: Information circular (United States. Bureau of Mines) ; 8879. 

~TN295rU4JilD9540.8.U52] 622s [336.2'7833385] 82-600058 

AACR2 



For sale by the Superintendent of Documents, U.S. Government Printing Office 
Washington, D.C. 20402 



CONTENTS 



Page 



Abstract 1 

Introduction 1 

Acknowledgments 2 

Summary of State severance taxes 2 

Hypothetical illustration of the State severance tax on minerals — impact on 

cash flow 13 

Estimated effect of severance tax rate changes on copper recovery costs 15 

Methodology 15 

Results of analysis 17 

Significance of results 22 

Conclusion 22 

References 23 

TABLES 

1. Summary of State severance taxes on mineral production as of July 1, 1981.. 3 

2. Hypothetical illustration of the use of the State severance tax on a 

nonf uel mineral 14 

3. Effect of assumed severance tax rate changes on copper recovery cost at 

given levels of potential availability, domestic properties 18 

4. Effect of assumed severance tax rate changes on copper recovery cost at 

given levels of potential availability, producing domestic properties.... 20 

5. Effect of assumed severance tax rate changes on copper recovery cost at 

given levels of potential availability, nonproducing domestic properties. 21 



STATE SEVERANCE TAXES: A SUMMARY AND AN ANALYSIS OF THE IMPACT 
OF RATE CHANGES ON COPPER RECOVERY COSTS 

By Phillip N. Yasnowsky ] and Annette P. Graham 



ABSTRACT 

This Bureau of Mines report summarizes State severance taxes 
imposed on minerals and mineral fuels, provides a hypothetical example 
of how a State severance tax affects selected components of a firm's 
income statement, and uses the Bureau's Minerals Availability System 
(MAS) to estimate the effect of assumed changes in State severance tax 
rates on copper recovery cost at given levels of potential copper avail- 
ability. A reduction of the rates to zero or a doubling of them results 
in changes in costs that are of the same order of magnitude as the cost 
of transporting copper to the United States from major foreign producing 
countries. 

INTRODUCTION 

This Bureau of Mines report provides information and analyses 
regarding State severance taxes on minerals. Severance taxes may be 
levied on the "severing" of any natural resource such as minerals, tim- 
ber, or fish. However, severance taxes on minerals are of special 
interest because they are the most important in dollar terms and also in 
frequency of application. Although the tax system of an individual 
State is the prerogative of that State, State taxes affect the mineral 
industries and mineral supplies; therefore, they are of interest to the 
Bureau of Mines. Only the overall or general effects of severance taxes 
are analyzed in this paper; an analysis of individual State severance 
taxes is not undertaken. 

This report is an update and expansion of work done previously by 
the authors (10-11) . 2 For a comprehensive background study of severance 
taxes, the reader is referred to Information Circular 8788 (6). The 
Bureau of Mines Minerals Availability System (2^, _5, 9) is used to ana- 
lyze the possible effect of severance taxes on copper recovery costs. 

'Economist, Branch of Economic Analysis, Bureau of Mines, Washington, D.C. 
2 Underlined numbers in parentheses refer to items in the list of references at the 
end of this report. 



ACKNOWLEDGMENTS 



The authors wish to thank Aldo F. 
Barsotti, supply analysis studies coordi- 
nator, Division of Minerals Availability, 
Bureau of Mines, Washington, D.C., and 
Robert L. Davidoff, mineral economist, 



Minerals Availability Field Office, 
Bureau of Mines, Denver, Colo., for their 
assistance in the use of the Supply Anal- 
ysis Model. 



SUMMARY OF STATE SEVERANCE TAXES 



Severance taxes have been defined as 
"taxes imposed distinctively on removal 
of natural products — that is, oil, gas, 
other minerals, timber, fish, etc. — from 
land or water and measured by value or 
quantity of products removed or sold" 
(8_) . These taxes are generally levied by 
the State governments. 

Currently 33 States impose severance 
taxes on minerals. Table 1 lists the 
States and summarizes their severance 
taxes on minerals as of July 1, 1981. 
State statutes or appropriate summaries 
of statutes should be consulted if 
greater detail is needed. For severance 
tax use, various States apply unique 
definitions to terms such as gross value, 
market value, or taxable value. For 
example, the New Mexico Severance Tax 
Law defines gross value for potash as 
"33-1/3% of proceeds realized from 
the sale of potash products requiring 
processing or benef iciation and 33-1/3% 
of the value of potash products consumed 
in producing other potash products, less 
50% of such value as a deduction for 
expenses" (1_) . 

Generally severance taxes are levied 
on a physical unit or value basis. The 
choice of a physical unit or value basis 
may be of considerable importance during 
periods of price changes. Some States 
recognize this when setting rates. For 



example, Minnesota and North Dakota tie 
some physical-unit-based taxes to price 
indexes. The number of States using each 
or both bases of taxation is as follows: 



Basis 

Unit and value, 
Value only . . . . 
Unit only , 



Number of States 

17 

11 

5 



The bases of individual taxes differ 
among States, making comparison of tax 
rates difficult. Generally, the rates 
based on gross value range from 2% to 
30%. On a physical unit basis, oil is 
subject to rates ranging from less than 
U/bbl to 80^/bbl. The rates on natural 
gas are from less than Ifc to 12.6^ per 
1,000 cubic feet. For the nonfuel miner- 
als, rates based on physical units are 
from 0.5«5/ton on salt in brine used for 
manufacturing (Louisiana) to $1.67/ ton 
for phosphate rock in Florida. 

Of the States with severance taxes 
on minerals, 16 States have broad-based 
taxes in the sense that they cover a wide 
range of minerals. The imposition of a 
severance tax does not necessarily mean 
that a mineral is currently produced in a 
State. For example, both Georgia and 
North Carolina tax oil and gas; however, 
there is no production of these fuels 
within these States at present. 



TABLE 1. - Summary of State severance taxes on mineral 
production as of July 1, 1981 



State and commodity 


Tax 


Rate and basis 


Alabama : 








Oil and gas production 
Oil and gas severance. 


3C/ton. 




2% of gross value. 
6% of gross value (4% 


Oil, gas, and other 


hydrocarbons . 




for new wells for 10 
years) . 






13.5<:/ton. 




Coal and lignite 
severance . 


20c/ton. 


Alaska : 






Oil 


Oil and gas production. 


15% of gross value (12.25% 
for new wells for 5 years) 
or 80c/bbl (greater amount). 


Gas 


do 


10% of gross value or 
6.4<?/ 1,000 cu ft (greater 










amount ) . 


Oil 


Regulation and 
conservation. 


0.125c/bbl. 


Arizona : All minerals .... 


Transaction privilege.. 


2.5% of gross income. 


Arkansas : 






Barite, bauxite, titanium 


Natural resources 


15<?/ton. 


ore, manganese and manga- 


severance. 




niferous ores, zinc ore, 






cinnabar, and lead ore. 






Coal, lignite, and iron ore 


do 


20/ton. 


Gypsum (sold for use out of 
State) , chemical-grade 


do 


1.5<:/ton. 






limestone, silica sand, 






and dimension stone. 






Crushed stone, including 


do 


lC/ton. 


chert, granite, slate, 






novaculite, limestone, 






construction sand, 






gravel, clay, chalk, 






shale, marl. 








do 


30c/ 1,000 bbl. 
$2/1,000 bbl. 


Salt water used as raw 


do 


material for bromine. 






Oil *. 


do 


4% of market value if 




producing 10 bbl/day 






or less plus 2.5c/bbl. 






5% of market value if 






producing more than 10 






bbl/day plus 2.5<?/bbl. 






0.3c/l,000 cu ft. 



TABLE 1 . - Summary of State severance taxes on mineral 
production as of July 1, 1981 — Continued 



State and commodity 


Tax 


Rate and basis 


Arkansas - continued 






Diamond, fuller's earth, 


Natural resources 


5% of market value. 


ochre, natural asphalt, 


severance. . 




native sulfur, salt, 






pearls, other precious 






stones, whetstone, nova- 






culite , all other natural 






resources except gypsum. 






Oil 


Oil and gas conservation 
do 


Not to exceed 2.5<:/bbl. 

Not to exceed 0.5c/ 1,000 cu ft 




California: Oil and gas... 


Oil and gas production. . 


Rate determined annually by 
Department of Conservation. 
The bases are barrels and 






cubic feet. 


Colorado: 








Oil and gas conservation 


Not to exceed 0.1c/$l of 






market value. 






•60c/ton plus a price index 






adjustment. 


Metallic minerals (except 


do 


2.25% of gross incope over 


molybdenum) . 




$11 million. 




do 


15(?/ton. 

2% of gross income (g.i.) 
under $25,000. 




do 










3% from $25,000 and under 






$100,000 g.i. 






4% from $100,000 and under 






$300,000 g.i. 






5% when g.i. exceeds $300,000. 


Oil shale 


do 


4% of gross proceeds. 




No mineral severance tax 
do 






Florida: 






Oil 


Oil and gas production. 
do 


8% of gross value. 




20.5% of gross value. 
5% of gross value. 
5% of market value. 


Gas 


do 


Solid minerals (except 
phosphate rock and 








heavy minerals) . 








do 


$1.67/ton plus a price 






index adjustment. 




do 


84<:/ton plus a price index 






adjustment. 



TABLE 1. - Summary of State severance taxes on mineral 
production as of July 1, 1981 — Continued 



State and commodity 



Tax 



Rate and basis 



Georgia: 

Oil 

Gas 

Hawaii: All minerals.... 

Idaho: 

Ores 

Oil 

Gas 

Oil and gas 

Illinois 

Indiana: Oil, gas and 
other hydrocarbons. 

Iowa 

Kansas: 

Oil 

Gas 

Kentucky: 

Oil 

Coal 

All minerals (except coal 
and oil). 

Louisiana: 

Oil 

Gas 

Distillate, condensate, or 
similar natural resources 
severed with oil or gas. 

Natural gasoline, casing- 
head gasoline and other 
natural gas liquids, 
ethane or methane re- 
covered through process- 
ing gas after separation 
of oil, distillate, or 
similar natural resources. 



Oil and gas production. 
do 



General excise. 



Ore severance 

Oil and gas production. 



do. 



Additional oil and gas 
production. 

No mineral severance tax. 

Petroleum production 



No mineral severance tax. 



Oil and gas production. 
do 



Oil production. 
Coal severance. 



Natural resource 
severance. 



Natural resources 
severance. 

do 

do 



do. 



0.5c/bbl. 
0.05c/l,000 C u ft. 

0.5% of gross proceeds. 



2% of net value. 

Determined annually, but not 

to exceed 0.5c/bbl. 
Determined annually, but not 

to exceed 0.50/50,000 cu ft, 
2% of market value. 



1% of value. 



0.4c/bbl. 
0.085c/l,000 cu ft, 



4.5% of market value. 

4.5% of gross value (minimum 

of 50£/ton). 
4.5% of gross value. 



12.5% of value. 

1.3C to 7c/l,000 cu ft, 
12.5% of value. 



lOc/bbl. 



TABLE 1 . - Summary of State severance taxes on mineral 
production as of July l t 1981 — Continued 



State and commodity 



Tax 



Rate and basis 



Louisiana - continued 

Butane and propane recov- 
ered through processing 
gas after separation of 
oil. 

Coal 

Gravel 

Marble 

Ores 

Salt 

Salt content in brine 
used for manufacturing. 

Sand 

Shells 

Stone 

Sulfur 

Maine 

Maryland 

Massachusetts 

Michigan: 

Gas 

Oil 



Minnesota: 

Taconite, semitaconite , 

and iron sulfides. 
Other iron ore 



Natural resources 
severance . 



do 

do 

do 

do 

do 

do 

do . .. 

do 

do 

do 

No mineral severance tax. 

do 

do 

Gas and oil severance. 



Taconite, semitaconite, 
and iron sulfides. 

Other iron ores 

Taconite and iron sul- 
fides. 



,do. 



Iron severance 

do ' 

Ore royalty 

do 

Taconite, iron sulfides, 
and agglomerate. 



5c/bbl. 



10c/ton. 

3c/ton. 

20c/ton. 

IOC/ton. 

6<?/ton. 

0.50/ton. 

3c/ton. 
4c/ton. 
30/ton. 
$1.03/long ton. 



5% of market value plus fee 

hot to exceed 1% of previous 

year's value. 
6.6% of market value plus fee 

not to exceed 1% of previous 

year's value. 



15% of value (minus certain 

costs) . 
15.5% of value (minus certain 

costs) . 
15% of royalty received. 

15.5% of royalty received. 

$1.25/long ton merchantable 
iron ore concentrate (5c/long 
ton for agglomerates) plus 
factors based on iron content 
and a price index. 



TABLE 1. - Summary of State severance taxes on mineral 
production as of July 1, 1981 — Cont inued 



State and commodity 




Rate and basis 



Minnesota - Continued 
Semltaconlte 

Copper-nickel ores.. 
Do 

Do 



Mississippi: 

Oil 

Oil 

Gas (including casing- 
head gas ) . 

Do 

Salt 

Missouri 

Montana : 

Coal 

Note: For both surface 
and underground, use 
the basis (per ton or 
value) that provides 
the greater yield. 



Semitaconite 

Occupation 

Mining , quarrying , and 
production of concentra- 
tes. 

Ore royalty 



Oil and gas severance .... 

Oil and gas board 

maintenance . 
Oil and gas severance .... 

Oil and gas board 
maintenance. 
Salt severance 

No minerals severance tax 

Coal severance 

Surface 



Underground. 



10c/ton of merchantable 
concentrate (5c/ton if 
agglomerated in State) plus 
factor based on iron content, 

1% of value. 

2.5c/long ton plus factor 
based on content. 

1% of royalties plus 1% of 
royalties paid on gold, 
silver, platinum, and other 
precious metals. 



6c/bbl or 6% of value 

(greater amount). 
0.8c/bbl. 

0.3C/1,000 cu ft or 6% of 

value (greater amount). 
0.08c/ 1,000 cu ft. 

3% of value of production. 



Applies to production greater 

than 5,000 tons/quarter as 

follows : 
7,000 or less Btu/lb, 12<:/ton 

or 20% of value. 
More than 7,000 to 8,000 

Btu/lb, 22c/ton or 30% of value, 
More than 8,000 to 9,000 Btu/lb, 

34c/ ton or 30% of value. 
More than 9,000 Btu/lb, 40c/ton 

or 30% of value. 
7,000 or less Btu/lb, 5c/ton or 

3% of value. 
More than 7,000 to 8,000 Btu/lb, 

8c/ton or 4% of value. 
More than 8,000 to 9,000 Btu/lb, 

10c/ton or 4% of value. 
More than 9,000 Btu/lb, 12c/ton 

or 4% of value. 



TABLE 1 . - Summary of State severance taxes on mineral 
production as of July 1, 1981 — Cont inued 



State and commodity 



Tax 



Rate and basis 



Montana - continued 
Metals, precious or 
semiprecious gems or 
stones. 



Metalliferous mines 
license. 



Oil and gas 

Do 

Perlite, vermiculite, 
kerrite, maconite, or 
other micaceous minerals. 

All minerals 

Nebraska : 

Oil and gas 

Do 

Nevada : 

All minerals 

Oil 

Gas 

New Hampshire 

New Jersey 

New Mexico : 

General (excluding oil, 
gas , other liquid hydro- 
carbons, and carbon 
dioxide) . 

Potash 

Do 

Molybdenum 

Other taxable resources. 

Copper 

Potash 



Oil and gas producers' 

severance. 
Oil and gas severance. 
Micaceous minerals 

license. 



Mineral mining. 



Oil and gas severance.... 
Oil and gas conservation. 



Net proceeds of mines... 



Oil and gas conservation. 
do 



No mineral severance tax. 
do 



Resources excise. 



Resources 

Processors' or service.. 

do 

do 

Severance 

do 



0.15% of gross value (g.v.) 

on first $100,000. 
0.575% on g.v. exceeding $100,000 

to $250,000. 
0.86% on g.v. exceeding $250,000 

to $400,000. 
1.15% on g.v. exceeding $400,000 

to $500,000. 
1.438% on g.v. exceeding 

$500,000. 
Oil 5% and gas 2.65% of 

gross value. 
0.05% of market value. 
5c/ton. 



0.5% of gross value over 
$5,000 plus $25. 



3% of value. 
0.1<?/$1 of value. 



Property tax rate of mine 
location applied to net 
proceeds. 

0.5c/bbl. 

0.5^/50,000 cu ft. 



Natural resources subject to 
either resources or pro- 
cessors' or service tax. 

0.5% of taxable value. 
0.125% of taxable value. 

Do. 
0.75% of taxable value. 
0.5% of gross value. 
2.5% of gross value. 



TABLE 1 . - Summary of State severance taxes on mineral 
production as of July 1, 1981 — Continued 



State and commodity 



Tax 



Rate and basis 



New Mexico - continued 

Gold, lead, silver, zinc, 

molybdenum, manganese, 

thorium, rare earth and 

other metals. 
Clay, gravel, gypsum, 

sand, pumice, and other 

nonmetals. 
Coal 



Uranium. 



Severance. 

do.. 

do.. 

do.. 



Oil and other liquid 
hydrocarbons . 

Gas , 

Carbon dioxide , 

Oil, gas, liquid hydro- 
carbons, and carbon 
dioxide. 

Do , 

Oil, gas, liquid hydro- 
carbons , geothermal 
energy and carbon 
dioxide, coal and 
uranium. 

Gas and hydrocarbons 
incidental to process- 
ing. 

New York , 

North Carolina: 

Oil , 

Gas , 

North Dakota: 

Oil and gas , 

Coal , 

Oil , 



Oil and gas severance . . . 



do. 

,do. 



Oil and gas privilege... 



Oil and gas ad valorem 

production. 
Oil and gas conservation. 



Natural gas processors'. 



No mineral severance tax. 



Oil and gas conservation. 
do 



Oil and gas production.. 
Coal severance 



0.125% of gross value. 



Do. 



82.6c/ton plus a price 
index adjustment. 

Rates per pound of U3O8 range 
from 2% for taxable value of 
$5 or less to $3.15 plus 
12.5% of excess over $40 
for taxable value of $40 
or more. 

3.75% of taxable value. 

12.6c/l,000 cu ft. 
3.75% of taxable value. 
2.55% of value. 



Rate certified to Oil and 
Gas Accounting Division. 
0.19% of value. 



0.45% of value. 



Oil extraction. 



May not exceed 0.5c/bbl. 
May not exceed 0.05<?/ 1,000 
cu ft. 



5% of gross value. 

85c/ton plus increase based 

on a price index. 
6.5% of gross value. 



10 



TABLE 1 . - Summary of State severance taxes on mineral 
production as of July 1, 1981 — Cont inued 



State and commodity 



Tax 



Rate and basis 



Ohio: 

Coal and salt 

Limestone and dolomite... 

Sand and gravel 

Oil 

Gas 

Oklahoma : 

Asphalt , ores bearing 
lead, zinc, jack, gold, 
silver, and copper. 

Oil or other crude or 
mineral oils , natural 
and casinghead gas. 

Uranium 

Gas (natural and/or 
casinghead) . 

Coal 

Oregon 

Pennsylvania 

Rhode Island 

South Carolina 

South Dakota: 

Energy minerals 

Gold and silver 

Tennessee: 

Oil and gas 

Coal 

Texas : 

Oil 

Gas 

Sulfur 

Utah: 

Gold, silver, copper, 
lead, iron, zinc, tung- 
sten, uranium, or other 
valuable metal. 



Resource severance . 

do 

do , 

do 

do 



Oil, gas, and mineral 
gross production. 



.do. 



,do. 



Natural gas and casing- 
head gas conservation 
excise. 

Coal production 



No mineral severance tax. 



.do. 
,do. 
,do. 



Energy minerals severance 
Precious metals severance. 



Oil and gas severance. 
Coal severance 

Oil production 

Natural gas production 
Sulfur production 

Mining occupation 



4c/ton. 
10/ton. 
lC/ton. 
3c/bbl. 
lc/ 1,000 cu ft, 



0.75% of gross value. 



7.085% of gross value, 



5% of gross value. 
70/1,000 cu ft of gas 

produced and saved, less 

7% of gross value. 
5o/ton. 



4.5% of taxable value, 
6% of total receipts. 



1.5% of sales price. 
20c/ton. 



4.6% of market value plus 

0.1875<7bbl. 
7.5% of market value. 
$1.03/long ton. 



1% of gross value. 



TABLE 1 . - Summary of State severance taxes on mineral 
production as of July 1, 1981 — Continued 



11 



State and commodity 


Tax 


Rate and basis 


Utah - continued 






Oil, gas, and other 




2% of gross value. 


hydrocarbons . 








Oil and gas conservation. 
No mineral severance tax. 


0.15o/$l of market value. 






do 




Washington: All minerals.. 


Business and occupation.. 


0.44% of value. 


West Virginia: 






Limestone or sandstone, 


Occupational gross income. 


2.2% of gross proceeds of 


quarried or mined. 




production (g.p.p.). 


Mineral products not 




4.34% of g.p.p. 


quarried or mined. 






Coal 


do 


3.85% of g.p.p. 
4.34% of g.p.p. 
8.63% of g.p.p. if over 
$5,000. 


Oil 


do 




do 








do 

Metalliferous minerals 


2.86% of g.p.p. 

6% when average net 


Wisconsin: Metalliferous 


minerals . 


occupation. 


proceeds (a.n.p.) in pre- 
ceding 3 years are 
$100,001 to $4,000,000. 

12% when a.n.p. are 
$4,000,001 to $10,000,000. 

16% when a.n.p. are 
$10,000,001 to $20,000,000. 

18% when a.n.p. are 
$20,000,001 to $30,000,000. 

20% when a.n.p. exceed 
$30,000,000. 


Wyoming : 








Oil and gas production... 
Mining excise and 


0.06c/$l of value. 

5.5% of gross value (g.v.). 






severance . 








6% of g.v. 


Oil shale and other 


do 


4% of g.v. 


fossil fuels (except 






coal, oil, gas). 







12 



TABLE 1 . - Summary of State severance taxes on mineral 
production as of July 1, 1981 — Cont inued 



State and commodity 


Tax 


Rate and basis 


Wyoming - continued 

Coal 


Mining excise and 

severance. 
do 


10.5% of g.v. 
2% of g.v. 









NOTE. — This summary of mineral severance taxes is comprehensive in that an effort 
has been made to include all State taxes that specify some sort of unique 
treatment with regard to mineral production. Therefore, some State taxes 
included here may not be considered severance taxes in other compilations. 



Source: Commerce Clearing House, Inc. State Tax Guide: All States. 
Chicago, and Washington, 1980 (with updated supplements). 



New York, 



13 



HYPOTHETICAL ILLUSTRATION OF THE STATE SEVERANCE TAX 
ON MINERALS — IMPACT ON CASH FLOW 



A major concern of mining operations 
subject to State severance taxes is their 
negative impact on cash flow. 3 The fol- 
lowing is a simplified, hypothetical 
illustration of how the severance tax at 
various rates affects cash flow. The 
components of cash flow used are the 
standard, basic ones used by most bus- 
inesses. The addition of the percentage 
depletion allowance amount to cash 
flow is unique for those businesses 
engaged in mining. Other types of busi- 
nesses may have more or fewer compon- 
ents of cash flow, depending on their 
operations. 

Depreciation, depletion, amortiza- 
tion, and deferred deductions are 
"book deductions" for tax purposes, 
and these deductions correspond to 
actual expenditures only by coincidence 
(7)» These "book deductions" and net 
profit are available to be reinvested 
by the owners of a business. Net 
profit plus the aforementioned noncash 
expenditures make up the cash flow of a 
business. 

The impact of the State severance 
tax at various rates is presented in a 
hypothetical case in table 2. The abbre- 
viated income statement in table 2 shows 
the effects of severance taxes of 2.5% to 
30% (of gross income from mining) on cash 
flow. It should be pointed out that this 
illustration does not take into con- 
sideration any exemptions, credits, or 
other special provisions provided by 
most States to businesses subject to 
the tax. Additionally, the Federal 

^Cash flow is the after-tax money that 
remains available to a company or an 
individual to pay off its debts and 
invest in new projects from sales reve- 
nue after paying all of its operating 
expenses and income taxes (7). 



corporate income tax rate is the highest 
rate used currently. 

Cash flow represents the true inflow 
and outflow of purchasing power for the 
business. Any expense requiring a cash 
outlay reduces earnings. Severance 
taxes, like State income taxes and other 
taxes on income, require cash outlays. 
For Federal income tax purposes these 
expenses reduce taxable income in the 
year that they are paid. Despite this 
seemingly positive aspect of the sever- 
ance tax as an expense item, table 2 
shows that the impact on cash flow for 
our hypothetical business is a negative 
one. With expenses (except those listed 
separately) , depreciation and percentage 
depletion remaining at the same levels 
(for severance tax rates of 2.5% to 20%), 
it can be seen that the impact of the 
severance tax is to lower net income, a 
component of cash flow. Cash flow 
decreases from $410 million with a zero 
severance tax to $304 million with a 20% 
severance tax. At the 2.5% rate cash 
flow is 97% of the zero severance tax 
amount. Cash flow drops significantly to 
74% of the zero severance tax amount when 
a 20% rate is applied. 

The difficulties inherent in trying 
to isolate and analyze the impact of one 
tax are brought into focus with the 
application of the 30% tax rate. The 
severance tax of $296 million generated 
by this rate acts to reduce income before 
depletion and Federal income tax to a 
level such that the 50% limitation for 
percentage depletion comes into play. 
Under the other five cases the allowable 
percentage depletion is $148 million. 
With a 30% severance tax rate, the income 
on which percentage depletion is calcu- 
lated is reduced such that the amount 
allowed under the 50% limitation is only 
$124 million. 



14 



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15 



ESTIMATED EFFECT OF SEVERANCE TAX RATE CHANGES ON COPPER RECOVERY COSTS 



Methodology 

This study uses the Bureau of Mines 
Minerals Availability System (MAS) to 
estimate the effect of assumed changes in 
State severance tax rates on copper 
recovery costs at given levels of domes- 
tic copper availability. Availability is 
used here to mean the same thing as pro- 
duction. The following two paragraphs 
provide a brief and simplified explana- 
tion of the MAS, which is described in 
detail elsewhere (2, _5> 2) m 

The MAS is a Bureau system for de- 
termining potential mineral availability 



by identifying and then performing 
cost evaluations on major mineral depos- 
its. The Supply Analysis Model (SAM), 
which uses the discounted cash flow 
rate-of-return method, contains the 
financial analysis component of the 
MAS. The domestic copper part of the 
MAS consists of the 73 properties 
shown below, which are also the proper- 
ties used in the subsequent analysis. 
The analysis also considers separately 
the 34 producing and the 39 nonproduc- 
ing properties (status as of January 
1980). 



Producing 



Nonproducing 



Arizona: 


1. 


Bagdad 


2. 


Bluebird 


3. 


Christmas 


4. 


Cyprus Johnson Camp 


5. 


Esperanza 


6. 


Inspiration Area 


7. 


Lake shore 


8. 


Magma (Superior) 


9. 


Metcalf 


10. 


Miami Leach 


11. 


Mineral Park 


12. 


Mission San Xavier 


13. 


Morenci 


14. 


New Cornelia (Ajo) 


15. 


Ox Hide 


16. 


Pima 


17. 


Pinto Valley 


18. 


Ray 


19. 


Sacaton 


20. 


San Manuel-Kalamazoo 


21. 


Sierrita 


22. 


Silver Bell 


23. 


Twin Buttes 


Michigan: 


24. 


White Pine 


Montana: 


25. 


Butte 


Nevada 


: 


26. 


New Ruth 


27. 


Victoria 


28. 


Yerrington 



Alaska 


• 


1. 


Arctic Camp 


2. 


Bond Creek, Orange Hill 


3. 


Bornite 


4. 


Brady Glacier 


5. 


Yakobi Island 


Arizona: 


6. 


Casa Grande 


7. 


Copper Basin 


8. 


Dubacher Canyon 


9. 


Florence Conoco 


10. 


Helvetia East 


11. 


Helvetia West 


12. 


Miami East 


13. 


Oracle Ridge 


14. 


Palo Verde 


15. 


Peacock 


16. 


Red Mountain 


17. 


Safford Inspiration 


18. 


Safford Kennecott 


19. 


Safford Phelps Dodge 


20. 


Van Dyke 


21. 


Vekol Hills 


California: 


22. 


Lights Creek 


23. 


Walker 


Michigan: 


24. 


Presque Isle 


Minnesota: 


25. 


Minnamax 


26. 


Ely Spruce 



16 



Producing 



Nonproducing 



New Mexico: 

29. Chino 

30. Continental — Underground 

31. Continental — Surface 

32. Tyrone 
Tennessee: 

33. Copperhill 
Utah: 

34. Bingham 



Montana: 

27. Heddleston 
28.- Stillwater 

29. Troy 
Nevada: 

30. Hall 
New Mexico: 

31. Hillsboro (Copper Flat) 

32. Nacimiento 

33. Pinos Altos 
Utah: 

34. Carr Fork 1 
Washington: 

35. Sunrise 
Wisconsin: 

36. Crandon 

37. Flambeau 

38. Pelican River 
Wyoming: 

39. Kirwin 



*A producing property starting in October 1979. 



Domestic copper availability is 
determined by first performing a dis- 
counted cash flow rate-of-return analysis 
using January 1980 costs for each prop- 
erty in the desired group. Then the 73 
(or 34 or 39 as the case may be) proper- 
ties are ranked on the basis of the cost 
per unit of output required to bring them 
into operation. The amount of copper 
potentially available annually or in 
total is derived from the data for the 
individual properties. The increases in 
availability occur in a stepwise fashion 
in unequal increments with increased 
costs because the properties generally 
differ in the amount of copper available 
from them. Because this ranking of the 
properties to determine copper availabil- 
ity is done on the basis of cost, some 



nonproducing properties may be 
prior to some producers. 



phased in 



The sensitivity of copper recovery 
costs to changes in severance tax rates 
was estimated by assuming four cases of 
rates: (1) Base case, which holds sever- 
ance taxes at current levels, (2) all 
severance tax rates reduced to zero, (3) 
all severance tax rates doubled, and (4) 
all severance tax rates quadrupled. No 
changes were made in the taxes of States 
not utilizing severance taxes, nor were 
any changes made in the bases of the sev- 
erance taxes. The following tabulation 
shows which of the States where the 
73 copper properties are located levy 
severance taxes on copper: 



With Severance Taxes 



Without Severance Taxes 



Arizona 
Minnesota 
Montana 
Nevada 
New Mexico 



Utah 

Washington 
Wisconsin 
Wyoming 



Alaska 
California 
Michigan 
Tennessee 



The assumed cases, which are fairly 
extreme, are merely used to give an indi- 
cation of the impact of severance taxes 



on copper recovery costs and should not 
be considered realistic. Furthermore, 
it is not likely that all States with 



17 



severance taxes would act in such a con- 
certed fashion as is assumed here. How- 
ever, there have been some major changes 
in severance taxes affecting copper in 
recent years; for example, in Wisconsin 
(1). Also, legislation that would have 
raised a severance tax rate from 1.4% to 
30% for surface and 15% for underground 
mines was recently considered in Montana 
(3) . In Arizona, the severance tax on 
copper was reduced from 2.5% to 2.0% from 
June 1, 1978, to June 30, 1980, to help 
alleviate industry difficulties ( 1_) . 

There are several final points to 
be made in this discussion of the 
methodology: 

1. It is assumed that the effect of 
the tax is solely on cost, and that there 
is no shifting of the tax forward to the 
consumer. This is probably realistic 
because copper is traded in world markets 
and individual producers do not have con- 
trol over the price. In essence, statu- 
tory incidence is the same as economic 
incidence. 

2. The time period necessary to 
bring the properties into operation is 
not considered. Lead time is an impor- 
tant factor in determining miner- 
als availability, *and its omission 
here should be kept in mind. The SAM 
does have the capability for handling 
lead time, but it is not used in this 
report. 

3. The analysis here is on a prop- 
erty or project basis. In actuality, 
decisions to invest and bring mineral 
properties into operation are much more 
complex than is indicated in this paper. 
Individual companies, some with business 
pursuits in addition to mining, must make 
their decisions to invest on the basis 
of their own analyses of any given 
situation. 

4. The cost figures in this paper 
include a 15% rate of return on invested 
capital. 



Results of Analysis 

Table 3 shows the estimated effect 
of assumed severance tax rate changes on 
copper recovery costs for all of the 73 
domestic properties listed above. Annual 
recoverable copper is shown ranging from 
500,000 to 2.5 million metric tons in 
increments of 500,000 tons. The maximum 
annual recoverable copper from all 73 
domestic properties under the given con- 
ditions is 2.7 million metric tons. 
Total recoverable copper is shown ranging 
from 20 million to 60 million metric tons 
in increments of 10 million tons. The 
maximum total recoverable amounts to 
69 million metric tons. In 1979, the 
quantity of copper actually recovered 
from domestic mines was 1,444,000 metric 
tons. 

As shown in table 3, the assumed 
changes in State severance tax rates from 
current levels cause changes in copper 
recovery costs ranging from -bi to Hi 
per pound for the given levels of 
annual copper availability. The first 
500,000 metric tons of copper would be 
available at the same recovery cost 
regardless of which severance tax case is 
assumed. However, a considerable change 
in recovery cost occurs when the given 
level of copper availability is increased 
to 1 million metric tons annually. 
Reducing severance tax rates to zero 
results in a reduction in recovery cost 
of 6i (8.2%) per pound, and doubling the 
rates increases recovery cost by 6i 
(8.2%). The results become more mixed at 
higher levels of copper availability, 
depending on the severance tax case. For 
example, at a given level of copper 
availability of 1.5 million metric tons, 
a zero level of severance taxes reduces 
recovery cost by only \£ (1.1%) per 
pound, but doubling the tax rate 
increases the cost by li (7.9%). The 
assumed changes in severance tax rates 
affect the recovery cost of copper from 
domestic properties in a generally mixed 
fashion for reasons mentioned following 
the discussions of tables 4 and 5. 



18 



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19 



Table 4 shows the estimated effect 
of assumed severance tax rate changes on 
copper recovery costs for the 34 produc- 
ing domestic properties. Annual recover- 
able copper is shown ranging from 250,000 
to 1.5 million metric tons in increments 
of 250,000 tons. The maximum annual 
recoverable copper from these 34 produc- 
ing properties is 1.6 million metric 
tons. Total recoverable copper is shown 
in amounts ranging from 10 million to 
40 million metric tons in increments of 
10 million tons. The maximum total 
recoverable copper from these properties 
is 44 million metric tons. 

As shown in table 4, there is no 
obvious pattern in the percentage changes 
in copper recovery costs of producing 
properties due to the different severance 
tax cases or as levels of availability 
are changed. For example, reducing sev- 
erance taxes to zero reduces recovery 
costs by 2t (2.3%) at an annual copper 
availability level of 1 million metric 
tons. This reduction in cost is \i 
(1.0%) and 3i (2.5%) at annual copper 
availability levels of 1.25 million and 
1.5 million metric tons, respectively. 

Table 5 shows the estimated effect 
of assumed severance tax rate changes on 
copper recovery costs for the 39 nonpro- 
ducing domestic properties. Annual 
recoverable copper is shown ranging from 
250,000 to 1 million metric tons in 
increments of 250,000 tons. The maximum 
quantity of copper potentially available 
annually from the nonproducing properties 
is 1.1 million metric tons. Total 
recoverable copper is given in a range 
from 5 million to 20 million metric tons 
in increments of 5 million tons. The 
maximum total recoverable amount of cop- 
per from nonproducing domestic properties 
is 25 million metric tons. 

As in tables 3 and 4 , the data for 
changes in recovery cost in table 5 do 
not exhibit any particular pattern. The 
severance tax rate level does have a con- 
siderable impact on the recovery costs of 
the first increment of copper potentially 



available from nonproducing proper- 
ties. For the first 250,000 metric tons, 
reducing severance tax rates to zero 
decreases the recovery cost by li (9.5%), 
and doubling the rates increases this 
cost by 91 (12.2%). The relative effect 
at subsequent levels of availability is 
more moderate. 

As noted in the methodology section 
above, the 73 (or 34 or 39) properties 
are ranked according to per-unit cost, 
and a given level of availability is 
reached by adding up the quantities 
available from individual properties. 
The cost figure at a given level of 
availability is the cost required to 
bring into operation sufficient proper- 
ties to attain that level. Only the last 
(or last few) properties will have that 
cost figure; the others will have lower 
costs per unit. 

The severance tax rate changes 
affect not only the per-unit recovery 
costs, but also the order in which the 
properties are ranked. Only the proper- 
ties located in the States currently 
imposing severance taxes will have recov- 
ery costs affected by the rate changes. 
For example, assume State X has a sever- 
ance tax of 5% and State Y does not 
impose one. At current rate levels, a 
property in State Y might be phased in 
prior to a property in State X. However, 
if severance tax rates are reduced to 
zero, the property in State X may then be 
phased in first. Furthermore, the quan- 
tities available from individual proper- 
ties, on either an annual or a total 
basis, differ. Therefore, a change in 
ranking may also lead to a change in the 
number of properties required to reach a 
given level of availability. As an 
illustration, when considering all 73 
domestic properties, it takes 23 proper- 
ties to achieve an annual level of copper 
availability of 1 million metric tons, 
assuming severance tax rates at current 
levels. If severance tax rates are 
reduced to zero, it takes only 21 proper- 
ties to reach 1 million metric tons. 



20 





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22 



Significance of Results 

Given the relatively extreme assumed 
tax changes, the resultant changes in 
recovery costs are not particularly sig- 
nificant in an absolute sense. This is 
partly because not all of the States 
included in the analysis levy severance 
taxes, and in those that do, the rates 
applied are generally relatively low. 
Also, the effect of the severance tax is 
lessened owing to its deductibility in 
computing the Federal income tax. Of 
course, the effect on any individual 
operation could be significant. 

The changes in recovery cost per 
pound of copper, ranging from -b£ to It 
for the "all properties" cases of zero 
severance tax rates and a doubling of the 
rates, (table 3), need to be placed in 
perspective to determine some sort of 
relative significance. The competitive- 
ness of the U.S. mineral industries in 
world markets has been of concern in 
recent years. Therefore, an appropriate 
measure against which to judge the sig- 
nificance of these cost changes would be 
transportation costs. 

It has been observed that "most met- 
als and minerals are international com- 
modities in that only a few cents per 
pound can move them physically in the 



major markets of the world" (4). Cer- 
tainly copper is one of these "inter- 
national commodities." The following is 
a sample of ocean liner rates (excluding 
bunker fuel surcharges) that existed in 
March 1980: 

— Less than kt per pound for 
Chilean and Peruvian copper 
bars to U.S. Atlantic and 
gulf coast ports. 

— Between 2t and 5t per pound 
for copper concentrates 
from South America, Africa, 
and the Far East. 

These transportation cost figures are of 
the same general magnitude as the changes 
in the copper recovery cost figures 
caused by the assumed changes in 
severance tax rates. Of course, as noted 
earlier, it is not likely that all States 
would make such changes in severance tax 
rates. However, major changes in sever- 
ance taxes on copper, which could be due 
to changes in the rates or bases of pres- 
ent taxes or the imposition of new ones, 
could have a comparable effect on the tax 
burden of copper producers. Also, these 
results are more significant when it is 
remembered that the severance tax is only 
one of the taxes levied on copper 
producers. 



CONCLUSION 



Currently 33 States levy severance 
taxes on minerals. Most States use a 
value base as opposed to a physical unit 
base; however, a few States use price 
indexes to adjust the rate on unit based 
taxes. Only 16 States have broad-based 
severance taxes that cover a range of 
minerals. 

The 73 domestic copper properties in 
the Bureau of Mines Minerals Availability 
System have been used to estimate the 
effects of assumed changes in severance 



tax rates on copper recovery costs. The 
changes in recovery costs are small given 
the relatively extreme assumed changes in 
severance tax rates. However, these 
results are not insignificant because the 
severance tax is only a small part of the 
total tax burden on copper producers. 
Furthermore, a reduction of the rates to 
zero or a doubling of them results in 
changes in costs that are of the same 
order of magnitude as the cost of trans- 
porting copper to the United States from 
major foreign producing countries. 



REFERENCES 



23 



1. Commerce Clearing House, Inc. 
State Tax Guide: All States. New York, 
Chicago and Washington, 2d ed. , 1980, 
2 vols, with updated supplements. 

2. Davidoff , R. L. Supply Analysis 
Model (SAM): A Minerals Availability 
System Methodology. BuMines IC 8820, 
1980, 45 pp. 

3. Mining Journal (London). Mining 
Week. Mar. 6, 1981, p. 167. 

4. Morgan, J. D. Strategic Minerals: 
Overview. Pres. at U.S. Department of 
State, Foreign Service Institute, Science 
Symposium Series, Strategic Materials 
Supply: An International Minerals 
Crisis?, Washington, D.C., Mar. 4, 1981, 
15 pp.; copy available from authors of 
this Information Circular. 

5. Rosenkranz, R. D. , R. L. Davidoff, 
and J. F. Lemons, Jr. Copper Availabil- 
ity — Domestic: A Minerals Availability 
System Appraisal. BuMines IC 8809, 1979, 
31 pp. 



6. Starch, K. E. Taxation, Mining, 

and the Severance Tax. BuMines IC 8788, 
1979, 65 pp. 

7. Stermole, F. J. Economic Evalu- 
ation and Investment Decision Methods. 
Investment Evaluations Corp., Golden, 
Colo. , 1974, 350 pp. plus index. 



8. U.S. Bureau of the Census. 
Tax Collections in 1974. 



State 



9. U.S. Bureau of Mines — Mineral 
Supply. The Bureau of Mines Minerals 
Availability System and Resource Classi- 
fication Manual. BuMines IC 8654, 1974, 
199 pp. plus appendix, 15 pp. 

10. Yasnowsky, P. N. , and A. P. 
Graham. State Severance Taxes on Mineral 
Production. Proc. Council of Economics, 
105th Ann. Meeting, AIME, Las Vegas, 
Nev. , Feb. 22-26, 1976, pp. 45-58. 

11. . State Severance Taxes on 

Nonfuel Minerals as of January 1, 1978. 
BuMines IC 8774, 1978, 6 pp. 







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